Airline financial outlook strengthens

By Lexi Dupre |Thursday, December 12, 2013

The International Air Transport Association (IATA) announced today that airlines are expected to return a global net profit of $12.9 billion for 2013. This is expected to improve to a net profit of $19.7 billion in 2014. Both are improvements on the September forecast, which anticipated an industry net profit of $11.7 billion in 2013 increasing to $16.4 billion in 2014.
The upward revision reflects lower jet fuel prices over the forecast period as well as improvements to the industry’s structure and efficiency already visible in quarterly results this year. Passenger markets continue to outperform the cargo business which remains stagnant both on volumes and revenues.
“Overall, the industry’s fortunes are moving in the right direction. Jet fuel prices remain high, but below their 2012 peak. Passenger demand is expanding in the 5-6 percent range — in line with the historical trend. Efficiencies gained through mergers and joint ventures are delivering value to both passengers and shareholders. And product innovations are growing ancillary revenues,” said Tony Tyler, IATA’s director general and chief executive officer.
IATA expects 2014 to be a second consecutive year of strengthening profitability (beginning from 2012 when airlines posted a net profit of $7.4 billion). The anticipated $19.7 billion profit in 2014 would come on projected revenues of $743 billion. This would be the largest absolute profit for the airline industry, surpassing the $19.2 billion net profit that the industry returned in 2010.
“We must temper our optimism with an appropriate dose of caution. It’s a tough environment in which to run an airline. Competition is intense, and yields are deteriorating. Cargo volumes haven’t grown since 2010, and cargo revenues are back at 2007 levels. The passenger business is expanding more robustly. Some airlines will out-perform our estimates, and others will under-perform,” said Tyler.
This improved financial forecast is driven by a few key elements: passenger demand, ancillary revenues, cargo demand and reduction in fuel prices, as reported by the IATA.
Passenger demand is robust amidst intense airline competition, and passenger numbers are expected to reach 3.1 billion in 2013 and rise by 6 percent to 3.3 billion in 2014.
Ancillary revenues are a key driver of improved financial performance. Worldwide ancillary revenues have risen to an estimated $13 per passenger. On a per passenger basis, ancillary revenues are greater than the $5.94 per passenger profit that airlines are expected to earn in 2014.
Cargo demand remains largely stagnant. Airlines are expected to carry 51.6 million tonnes of cargo in 2013, increasing to 52.5 million tonnes in 2014. Despite the stagnation in the air cargo industry, belly capacity continues to be introduced as airlines seek to maximize on the robust passenger demand. Cargo revenues are expected to be $60 billion in both 2013 and 2014.
A slight reduction in jet fuel prices is a major driver of the improved outlook. Following easing of tensions in Iran, oil prices are expected to see a slight downward movement from $108.20 per barrel in 2013 to $104.50 per barrel in 2014. This positive trend will be amplified by a reduction in the crack spread of jet fuel resulting in savings of $2 billion in 2013 (to $211 billion) and $5 billion in 2014 (to $210 billion) for the overall industry fuel bill compared to the September forecast.
IATA reports that profitability varies greatly by region as well as by airline. All regions are expected to see improvements in profitability in 2014 compared to 2013. With the exception of Africa, all regions are expected to see better profitability in 2014 than previously forecast.
North American airlines are expected to post a $5.8 billion profit in 2013, increasing to $8.3 billion in 2014. In both years, North American carriers will outperform the aggregate industry to deliver both the highest absolute profits and the strongest earnings margins (4.8 percent in 2013, 6.4 percent in 2014).
Asia-Pacific airlines are expected to post a $3.2 billion profit in 2013, which will be a third consecutive year of declining profits. The trend is expected to reverse in 2014 with a slight uptick to $4.1 billion. The profitability of the region’s airlines is subdued by the ongoing weakness in cargo demand and the impact on supply-demand conditions of an expected delivery of 710 new aircraft next year.
European airlines will see profitability improve in 2014 over 2013. Net profits for 2013 are expected to be $1.7 billion, rising to $3.2 billion in 2014. Efficiencies from joint ventures over the North Atlantic are expected to be a major contributor to this improvement, offsetting slightly the impact of the continuing economic slump across the eurozone.
Latin America is expected to return a $700 million profit in 2013, increasing to $1.5 billion in 2014. The region’s earnings margin also continues to improve from 3.1 percent in 2013 to an expected 5.1 percent in 2014. Airlines in the region are burdened with infrastructure that is not keeping pace with the growth in demand. While some countries, such as Chile, have worked hard to evolve a policy framework on which airlines can grow and drive economic growth, others have policies that are counterproductive, IATA said.
The outlook for African airlines is unchanged from September, with a $100 million loss in 2013 switching to a $100 million profit in 2014. It is the weakest financial performance of any region with an earnings margin of -0.5 percent in 2013 improving to 0.7 percent in 2014.
Middle East airlines are expected to return a net profit of $1.6 billion in 2013, increasing to $2.4 billion in 2014. Earnings margins also continue to improve from 3.8 percent in 2013 to 4.7 percent in 2014.The region’s hubs continue to expand in support of growing long-haul connectivity.